Exam 14: Exchange Rates I: the Monetary Approach in the Long Run

When we incorporate a relationship between expected inflation and liquidity preference (demand for real balances) into our long-run model, which of the following occurs?

Economists consider central bank independence to be a key factor in keeping inflation under control. Why?

The real interest rate is equal to:

When the price of a good in the United States is $2, while in Spain it is €2, and the nominal exchange rate is E_$/€ = 1.5, what is the relative price of the good in Spain versus the United States?

If we adjust the supply of money for changes in the price level, we get real balances. The demand for real balances is proportional to:

If inflation in the United States is 4% per year and in the United Kingdom it is 8% per year, and interest rate in the United Kingdom is 6%, then the Fisher effect predicts that the interest rate in the United States is:

We can use the existence of arbitrage and the idea of uncovered interest parity (UIP) to assume that any interest rate differential between two currencies must be offset by:

Discuss the benefits and drawbacks of low inflation, and describe issues in central bank policy following the financial crisis that began in 2008.

The cost of holding money is primarily the:

Combining the concepts of uncovered interest parity (UIP) and relative purchasing power parity (PPP), the ________ shows that differences in inflation rates between two nations will be equal to the difference in their nominal rates of interest.

If the exchange rate between the dollar and yen has risen, this would be consistent with:

If fewer home goods are required to buy the same amount of foreign goods, then we say that foreign currency has experienced a:

It has been abundantly demonstrated that nominal interest rates, exchange rates, and inflation are very tightly linked. In Italy, during the 1970s and 1980s, the inflation rate of the Italian lira was very erratic, changing each year in a range of 7% to 20% per year. Predict the effect on Italy's nominal interest rates and its exchange rates with other nations during that period.

With relative PPP, a rise in a nation's inflation rate is always offset by an increase in the rate of __________ of its currency.

The real exchange rate between two currencies tells us:

Under the monetary approach to exchange rates, if real money demand is greater at home but relative money supply is greater in foreign markets, then the exchange rate should be:

When there is a hyperinflationary period, large changes in exchange rates and price levels happen ________ during periods of more stable prices and exchange rates.

What is the situation when a home currency purchases fewer goods and services at home than abroad when converted to a foreign currency?

(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. With the price of the computer given in local currency, the Indian rupee is:

A basket of goods sold in the Eurozone is priced and weighted as shown in the following table. If one were to use the simple model to predict the U.S. dollar/euro exchange rate, what would the expected exchange rate be?